Home > Economic policy > My evidence on the carbon price

My evidence on the carbon price

August 15th, 2011

Last week I appeared, by videolink, before the Senate Committee on New Taxes, to talk about the government’s carbon price and compensation package. I made some dot points, over the fold.

The inquiry was interesting, with one Senator insisting that the carbon price was different from the GST because, under the GST, businesses could claim their inputs and therefore didn’t have to pay anything. I tried to suggest that this was only true for businesses that didn’t add any value (it is, after all, a value added tax), but to no avail.

Proposed Carbon Price Legislation: Key points

This is a summary of the main points I propose to present in evidence to the Senate Select Committee on Scrutiny of New Taxes regarding the proposed Clean Energy Future legislation.

Both major parties state support for a target of 5 per cent reductions in Australia’s emissions, relative to 2000 levels, by 2020.

While a range of policy measures may be used to reduce emissions, all serious economic analyses of the topic show that a carbon price must be a central element of any cost-effective emissions reduction policy

The distinction between a fixed carbon price (for example, through a carbon tax) and a price determined by trade in a permit market with a fixed quantity of emissions (an emissions trading scheme) is of secondary importance. Broadly speaking, a fixed price is simpler and therefore preferable in the case of a national policy, especially if the issue is surrounded by confusion and controversy. An emissions trading scheme is easier to integrate with similar policies in other countries.

Treasury modelling shows that, especially after the return of revenue to households and businesses is taken into account, the effects of the proposed carbon price will be so modest as to be barely noticeable against a general background of a growing but variable economy. My own analysis confirms the results of this modelling. A particularly relevant observation is that the impact of the proposed carbon price will be about one-quarter that of the GST.

Recent claims by the NSW government that the carbon price will have a devastating impact on households on the state’s economy are unfounded and rely on misleading presentation of extreme cases, most notably in the claim that “household electricity bills will rise by ‘up to’ $498 a year.” The correct analysis, based on Commonwealth Treasury modelling yields average cost increase of $3.30 or about $170 a year. The NSW number is derived by taking a high-price projection applied to a household with electricity consumption far above the average.

The proposed compensation package for households is well-designed in its focus on low-income households, for whom the effective price increase as a proportion of income (around 1.2 per cent) will be substantially higher than for middle-income and high-income households.

The suggestion that the provision of compensation in the form of income tax cuts or higher pensions will undermine the incentive effects of a carbon price is incorrect, and reflects a misunderstanding of basic economics

Compensation provided to electricity generators and emissions-intensive export industries is somewhat higher than would be suggested as necessary by economic analysis. However, compared to the CPRS, the design of compensation has been improved, with a greater focus on measures designed to assist adjustment to a clean energy future.

The main area where Treasury modelling is subject to doubt relates to the extent to which Australian carbon emissions will respond to a price and, conversely, the proportion of the targeted emissions reductions that will be met by purchases of permits from overseas. International and Australian experience has shown that standard estimation procedures persistently underestimate responsive to carbon prices in the medium term and beyond. Most notably, whereas early projections suggested that the New Zealand ETS would require substantial purchases of overseas offsets, it now appears that the target will be reached without any such requirement.

Categories: Economic policy Tags:
  1. Hermit
    August 15th, 2011 at 15:02 | #1

    I suspect the Treasury modelling is closer to the money on voluntary energy use cuts by consumers. However on the supply side they predict (according to Swan) a groundswell in favour of renewable energy. This is odd since the wind generators themselves said they needed a carbon price of at least $40 not $23. This could be why the RET stayed in place against the advice of Garnaut. $23 adds to anxieties about future coal and gas prices so that it may well be true another wholly coal fired power station will never be built. We’ll have to see if renewables and efficiency can fill the gap.

    If 1c is spent on overseas permits (as offsets) I think we should chuck a collective wobbly. If nothing else it shows the cultural cringe lives on if ‘their’ offsets are better than ‘ours’. Abbott is correct to question the veracity of these offsets; take for example the story of Norway and Bolivia http://amazonwatch.org/news/2011/0202-redd-flags

    By mid 2013 or so we’ll know if carbon tax made any early difference to emissions. We want to get from last year’s 580 Mt CO2e to 480 by 2020. Barring recession I think we’ll stay over 500 each year of the decade so the international adjustment is on the cards.

  2. John Quiggin
    August 15th, 2011 at 15:11 | #2

    “the wind generators themselves said they needed a carbon price of at least $40 not $23.”

    And of course, industries lobbying for a policy that benefits them are always careful not to overstate their needs :-) .

  3. Freelander
    August 15th, 2011 at 15:15 | #3

    I suppose another point is that investment would consider not only the current carbon price but how that price can be expected to evolve.

  4. KB Keynes
    August 15th, 2011 at 15:52 | #4

    I was amused that Ron Boswell mistook the Treasury official on modelling for Megan Gale

  5. August 15th, 2011 at 17:49 | #5

    And yet, there was Julie Bishop again today complaining that these “difficult economic times” were the wrong time (not that there would ever be a “right time” for Abbott and his merry little band of climate change deniers) to “increase costs” to households with a carbon “tax”. Once again she got away with this outrageous claim without a reporter pointing out that all except the rich would come out ahead – so even on Ms Bishop’s mindless criterion this is an excellent to introduce the measure!

  6. John Brookes
    August 15th, 2011 at 18:05 | #6

    Now, now David Horton, no taking the suffering of the rich lightly, if you please. They feel every missing dollar even more acutely than the rest of society…..

  7. sam
    August 15th, 2011 at 19:00 | #7

    Hermit, I don’t understand this aversion to overseas permits. Emission reduction investments are available to be had for $4 in some places. That sounds like a pretty good deal to me. If there’s some uncertainty we could simply count two offset tonnes as one. Eight bucks a tonne is still better than any prospective investment we could make here.

  8. rog
    August 15th, 2011 at 19:28 | #8

    Boswell would/might be funny if he was in a talent show on TV but he is in the Senate, reviewing what could be law.

  9. KE
    August 15th, 2011 at 22:26 | #9

    But John, if you’ve never worked in a business which makes tangible objects, how could you possibly know anything about climate change modelling?

  10. Mulga Mumblebrain
    August 16th, 2011 at 06:42 | #10

    rog, I find Ron ‘Creosote’ Boswell about as funny as a fire in an orphanage.

  11. Hermit
    August 16th, 2011 at 09:02 | #11

    @sam
    $4 to replace $23 sounds suss to me. The EU emissions trading scheme won’t have a bar of carbon sink offsets such as tree planting. Non-EU Norway paid the Bolivians to conserve a patch of forest so the Bolivians razed the even bigger adjoining forest. The EU endorses ‘clean development’ offsets whereby if a country uses less than their presumed entitlement the difference becomes a saleable credit. If you want a bigger credit inflate the entitlement. The EU also has excess permits floating around due to overgenerous free allocations.

    To test your thinking consider the case of carbon credits for natural gas flaring. Since methane is a worse GHG than CO2 the mere act of putting a match to a gas flare means the pollution is abated, hence a carbon credit is ‘earned’. But it is still pollution. The surplus gas could have been capped or pumped back underground so it is perverse to reward any pollution.

    If we can split offsets into carbon sinks and ‘clean development’ the former presents the moral hazard of exaggeration and the latter is misconceived. The spectacularly effective way to prevent future CO2 is to burn less coal. The whole business is an invitation to fraud and delusion.

  12. Sam
    August 16th, 2011 at 09:48 | #12

    Well, I disagree with your thinking in the second paragraph. Reducing pollution should be counted as a benefit, even if the new activity still pollutes a bit.

    As for $4 per tonne abatement, did you know there’s a pill to reduce global warming now?

  13. Jim Birch
    August 16th, 2011 at 10:10 | #13

    Is there a transcript?

  14. Hermit
    August 16th, 2011 at 10:15 | #14

    The basis for carbon penalties should be zero entitlement subject to compliance thresholds ie all large emitters. They shouldn’t be rewarded for low growth in emissions but forced into negative emissions growth. Scientist Richard Feynman said we can fool ourselves but we can’t fool Nature. If the natural world thinks GHGs are increasing then it will respond accordingly whether or not some Enron style carbon accounting says otherwise.

    I believe Australia is addicted to coal and that new renewables will barely make a dent in emissions despite the lovely TV ads. There may be some efficiency gains, for example we see voluntary energy cuts in Japan. In Australia I suspect that will peter out around the 50 Mt CO2 mark. A global economic slowdown may reduce emissions somewhat but people still need basic services. That probably means we won’t be on track by 2015 when the international offsets are mooted. I for one would be enraged if this happened.

    A 5% cut by 2020 over 2000 is pathetic. 40% is more like it. Using dodgy offsets (which I’d argue are not real CO2 cuts anyway) to cut the pathetic 5% is even more pathetic. Shame shame shame.

  15. Freelander
    August 16th, 2011 at 10:30 | #15

    Given that the warming is only about 0.7 C so far and everywhere people seem to be getting ‘once in a lifetime’ weather extremes, I wonder how bad things will get before politicians finally get serious? As for deniers, that anyone still listens to them just demonstrates what a crazy world we live in. And domestically, Tony Abbott and the loons that now seem to comprise most of the coalition, seem to be trying to adopt Tea party tactics with the objective of being elected regardless of how much damage they do in the process. That’s what happens when you have a failed priest leading a political party – ethics in politics [not].

  16. August 16th, 2011 at 10:35 | #16

    We produce CERs (offsets) Hermit, by replacing kerosene used for lighting in households with solar lights. The formula we use for the creation of offsets is based on kerosene usage data numbers we collect by measuring 1 month of kerosene usage in 500 households and then for 1 month after we have given them a solar light. This number is then averaged out across the 500 trials and applied to all the lights we sell in the (least developed) country in which the trial has been run.

    This is designed to reflect the reduced the volume of carbon used by an individual household, and is based on actual change in usage. I won’t get started on the health and social benefits of what we do either…

    Please don’t tar all of the companies producing CERs with the same brush. Some of us are innovative and are attempting to create real change at a household level.

  17. Sam
    August 16th, 2011 at 10:44 | #17

    Emissions cuts from family planning are real. The fact that they also reduce the need for land, water and food (and promote the status of women) is only a happy by-product.

    I don’t understand economic protectionism when it comes to solving a global problem. Australia isn’t the best at running ski resorts or building computer chips; it might not be the best at reducing emissions. As a rational consumer, if products are indistinguishable, I buy the cheapest. If an item on ebay has no warranty, but the price differential is large enough to offset the uncertainty cost of a dud, I still buy it.

  18. Sam
    August 16th, 2011 at 10:46 | #18

    @Jim Birch
    Was that comment addressed to me? What do you mean “transcript?”

  19. Tim Macknay
    August 16th, 2011 at 10:59 | #19

    Sam, I think Jim was asking Prof Q if there is a transcript of his evidence to the Senate Committee.

  20. Sam
    August 16th, 2011 at 11:09 | #20

    Ok thanks Tim.

    Also, “Extra Extra! Read all about it! Consumers who are at least somewhat rational respond to increases in the price of a partially substitutable good by reducing consumption!

  21. Freelander
    August 16th, 2011 at 11:30 | #21

    Transcripts are usually (or at least sometimes) available from the government website in a few days if I remember rightly. Just do a search for them.

    Oh look, there it is: http://www.aph.gov.au/hansard/senate/commttee/s201.pdf

  22. Freelander
    August 16th, 2011 at 11:33 | #22

    Everything is substitutable in consumption, although survival is not guaranteed!

  23. Michael
    August 16th, 2011 at 13:24 | #23

    @Liz Aitken
    The Mandarin solar light looks pretty cool. It is sad that international offsets seem to be dismissed out of hand these days. People seem to be far more excepting of the results from entertainment productions like Top Gear than companies that are attempting to solve climate related problems. Surely some exaggeration and even fraud may be committed by some companies but this isn’t a strong reason to assume that this is the default outcome.

  24. Jim Birch
    August 16th, 2011 at 13:27 | #24

    Thanks, Freelander, I couldn’t find it.

  25. sam
    August 16th, 2011 at 14:16 | #25

    @Michael
    Too right. Also, it’s not as though we have perfect certainty that domestic cuts are real either. A farmer might be paid to plant trees, but would have done it anyway for soil retainment purposes. A carbon capture plant project might leak gas out of its geological deposit.

  26. August 16th, 2011 at 16:23 | #26

    @Michael
    Thanks Michael, it is really difficult to gain traction with messaging when you are up against the negative machina that is groups like News Limited and even the LNP, who are constantly saying that “all monies from offset carbon trading will go offshore, and that we are “unaudited” or that carbon savings are “unauditable”.

    The fact that there is bugger all industry of our type (CER creation) in Australia at the moment is because there is no carbon market here. Despite this there are a few companies struggling to do it, and the only 2 Australian companies doing it are based in Melbourne. If the appropriate infrastructure existed (ie a market, bankers that could monetise the credits appropriately etc) then there would not be a “flow of funds overseas” for CERs as industry could actually develop here.

    We are indeed audited: we have to spend a fortune on verifiers to be registered under the UN protocol. It is particularly costly for us because we have to send them to remote villages in Africa (and soon Asia) to audit 200+ individual households. It is quite amusing though, sending Japanese businessmen into the depths of Tanzania in a jeep where there is NO internet or phone access, and the villagers barely speak English and neither do they! We are yet to find a fluent Swahili/Japanese interpreter so we have to send a Swahili/English interpreter and an English/Japanese one. Believe me, it is nothing like tromping off to a single cement plant in industrial China, at least there are basic amenities in China.

    The whole situation is so frustrating, and really makes me cross!

  27. Jim Birch
    August 16th, 2011 at 16:53 | #27

    Thanks for doing this JQ.

    Bonus points for your attempt to improve senatorial numeracy standards, even if it failed :)

  28. Hermit
    August 16th, 2011 at 16:55 | #28

    Everything becomes so much easier it we work on the presumption of zero entitlement to GHGs, subject to a practical cutoff limit for compliance. Thus kerosene lamp burners may be guilty of a few kilograms of CO2 a year while Hazelwood power station releases 14 billion kilograms. We also sidestep interminable arguments about whether carbon abatement schemes are ‘additional’ or would have been done anyway.

    The danger is we will conflate offset trading with foreign aid, perhaps tinged with First World guilt about our carbon profligate lifestyles. Now China is becoming wealthier that country may become less fashionable as a source of credits. For example the $550m they got from the World Bank to change the gas in refrigerators. A simple regulation would have sufficed, not a bribe. I’m also suspicious that banks want to get in on offset trading because I think they will get most of the benefit.

    All of this must be falling on deaf ears because the parliamentary committee is to consider carbon credits for farmers. If they feed their sheep toasted muesli or something GHGs will magically vanish. We’ll see the heat rising from Hazelwood’s smokestacks but it will all be offset by sheep with newly fresh breath.

  29. August 16th, 2011 at 17:03 | #29

    @Hermit
    Hermit, you will be pleased to know that as of 31 December 2012 China will no longer be eligible to create new CERs. The UNFCC was so concerned about exactly that issue that they have changed the list of countries eligible to create these credits. The list will match the “LDC” list: the list of least developed countries. The countries dropping off the list include China, India, Indonesia, Philippines, South Africa, Thailand.

    As it takes well over 12 months to get any form of UNFCC approval for a CER generating project, it is unlikely that we will see new developments being funded with UNFCC “backed” funds into the future in those countries.

    It does make your point about the mix between foreign aid and CER projects more valid though, as the types of countries that will be left on the list are places like most of Oceania (excluding Aust & NZ), most of Africa, Bangladesh & Pakistan (this list is not exhaustive).

  30. Freelander
    August 16th, 2011 at 17:19 | #30

    @Jim Birch

    Maybe they don’t pay tax under GST because they have managed some great fiddle. I imagine if your accounting is creative enough, but you would have to make a large enough paper loss to avoid paying GST on your labour and capital inputs? What is a worry is that Barnaby Joyce is supposed to be an accountant, but they had to quickly pull the plug on his Finance spokesman gig when they found he was innumerate.

  31. sam
    August 16th, 2011 at 17:37 | #31

    But sometimes, the projects with the cheapest abatement costs also have huge beneficial by-products. That’s a feature, not a bug.

  32. August 16th, 2011 at 18:36 | #32

    Hermit, feeding toasted muesli to sheep won’t make greenhouse gases vanish. But every day you eat food that contains carbon that has been removed from the atmosphere by agriculture (unless you are a robot). Agriculture is the only industry with experience at removing CO2 from the atmosphere. All this carbon is normally released back into the atmosphere through either respiration or combustion. However, if the agricultural industry can receive a credit for removing CO2 from the atmosphere and keeping it out, then some of the hundreds of millions of tonnes of CO2 agriculture removes from the atmosphere each year in Australia will be removed long term. There are various ways to achieve this including increasing the amount of carbon in soil, growing trees, and dumping wood or other plant material in the ocean.

  33. Hermit
    August 17th, 2011 at 07:15 | #33

    @Ronald Brak
    Like I said, an invitation to fraud.

  34. John Quiggin
    August 17th, 2011 at 08:55 | #34

    I share Hermit’s scepticism about the idea that we should meet the 2020 goals largely through imports. As I argued, I think there is much more room for domestic emissions reductions than is captured in standard models.

    At some point, when a global trading scheme is properly established, and our per capita target declines to a level more comparable with the rest of the world, our energy endowments mean that importing permits makes sense. But that is some time off.

  35. August 17th, 2011 at 13:25 | #35

    Hermit, if Australian farmers are to be paid to remove carbon from the atmosphere and sequester it, methods of preventing fraud will certainly be required. As distressing as it is to those accustomed to honesty from the Australian agricultural industry, at times agriculturalists have been found to lie about things ranging from the presence of cultural artefacts to whether or not they have grown cannabis.

  36. sam
    August 17th, 2011 at 18:52 | #36

    I still don’t understand why anyone would pay $23 for something when they could get it for 4.

  37. sam
    August 17th, 2011 at 19:08 | #37

    Our emission per capita are 25 tonnes a year. We could cut our emissions by 100% for only $100 per person per year! Seems like a no-brainer to me!

  38. Freelander
    August 17th, 2011 at 19:30 | #38

    @sam

    True. Buy Australian is always what people want the other guy to do. I note that those who want us to buy from ‘Australian owned’ businesses, in operating those businesses, don’t see any need to purchase more expensive inputs in Australia, or, in some cases, locate their factories in Australia, in preference to elsewhere.

    I think we all support the idea of others doing as we wish (but maybe not as we do). I know I do!

  39. August 17th, 2011 at 19:36 | #39

    Sam, I would gladly contribute towards family planning and education in poor countries, but I would do it simply to help people in those countries and would not do it in the name of reducing carbon emissions. This is because I am scared that if people start thinking about the emission benefits of preventing a Liberian person from ever being born, it may lead them to think about the even greater emission benefits that would result if I were prevented from reproducing. Or worse, the emission benefits that could result if I were prevented from being born retroactively.

  40. sam
    August 17th, 2011 at 20:10 | #40

    @Ronald Brak
    It doesn’t really matter why you do it, all the benefits come nevertheless. I agree there are all sorts of positive external benefits, but it just so happens that even from the narrow perspective of climate abatement, it’s the most efficient approach. The improvement in the status of women, the development gains, the reduction (from baseline projection) of demand for natural resources, all of this is just a happy bonus

    That this amazing investment opportunity exists is simply due to bigoted religious people in western countries forcing their governments not to do the rational thing. Finding ourselves in such a world, the best thing for us rational people to do is (as always) to buy cheap.

    I think this idea people have of population control being coercive is just really wrong-headed. With 250 million women out there with unmet need for contraception, nothing could be less coercive than handing out condoms and OC pills with no strings attached.

    No one is talking about preventing people from reproducing anywhere.

    @Freelander

    Yeah, I don’t really get why people think buying Australian by preference is a good thing, even for other people to do. I don’t feel any greater solidarity for workers in Australia than workers in Asia. There are real problems with globalisation of course, but the lack of empathy for the global poor by the Protectionists is an attitude I find puzzling and can’t share.

  41. Mulga Mumblebrain
    August 17th, 2011 at 20:37 | #41

    Ronald Brak, the Right has been pushing the ‘over-population is the root cause of our ecological problems’ meme, hard, for some time. It is, I believe, bulldust, to disguise the truth that it is the rich world’s over-consumption that is the real problem. To blame the poor and downtrodden is an age-old Rightist habit, but this time I detect a sinister neo-Malthusian edge. Indeed, if you venture into the horror-zone of racism and xenophobia that is the Rightwing MSM blog Comments, you often see it openly advocated. That what the world needs is a great cull of these teeming hordes, whose tiny environmental footprint outrages those whose size 14s are crushing the biosphere. The rapid rise of global food prices, due to production plateauing, climate destabilisation, diversion of food for animal feed and bio-fuels and elite speculation in commodities markets is nearing a real crisis, and gigantic famines still wrack less happy lands like Somalia, particularly after Western ‘benevolence’ worsens the situation, as ever.

  42. sam
    August 18th, 2011 at 15:07 | #42

    @Mulga Mumblebrain
    I have no idea why you think neo-Malthusianism is sinister. I can’t imagine what’s “rightwing” about giving women who ask for it access to free birth control. I don’t understand how you can think Somalia’s problems aren’t due in part to a fertility rate above 6.

  43. Mulga Mumblebrain
    August 18th, 2011 at 21:21 | #43

    sam, I thought the thing about Malthusianism is that the population decline is caused by disease and famine, and is involuntary. A gradual and sustained reduction in the human population, realised humanely, by lowering the birth-rate, is something I believe in most strongly, and I see that process (which, alas, I now feel is unlikely to occur)as the exact antithesis of a Malthusian cull of ‘useless eaters’.

  44. sam
    August 19th, 2011 at 14:12 | #44

    Oh well, when I think neo-Mathusian, I just mean a concern about population growth.

Comments are closed.